What Is an Anti-Social Forces Clause? Key Points for Reviewing Anti-Social Forces Exclusion Clauses in Contracts

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

An anti-social forces exclusion clause (anti-social forces clause) is a clause used in contracts between companies. It is commonly placed toward the end of a contract in a standard form along the lines of "each party represents and covenants that it is not an anti-social force." However, the company should check, in light of the transaction, whether it is fine to leave it as boilerplate. This is because, if it turns out that a business partner is connected with anti-social forces, or if the company receives unjust violent demands, the clause can serve as the legal basis for promptly dissolving the contractual relationship and recovering the company's losses. That said, the company checks, in light of the contract and the law, whether the requirements for termination or damages are satisfied.

If a business relationship with anti-social forces comes to light, it affects the company's credibility and may lead to the suspension of financing from financial institutions, the suspension of business transactions, and even a serious adverse effect on a listing review. Rather than being satisfied with merely including the clause as a formality, the company should determine whether its content actually allows the transaction to be cut off in an emergency.

The Scope of the Anti-Social Forces Clause and the Requirements

When reviewing an anti-social forces clause, a distinction is drawn between "attribute requirements," which focus on the status of the persons concerned, and "conduct requirements," which focus on specific actions.

Attribute requirements have the counterparty represent and covenant that it, its officers and its beneficial owners do not fall under anti-social forces such as organized crime groups, organized crime group members and corporate racketeers (sokaiya). Because the wording and scope of the definitions in the organized crime exclusion ordinances enacted by each local government differ by region, the regulation under the ordinances and the contract's own scope of coverage are checked separately. The company confirms that the coverage includes not only the party itself but also its officers, shareholders with substantial influence over management, and its parent and subsidiary companies.

Conduct requirements have the counterparty promise, regardless of whether it falls under anti-social forces, not to engage in violent demands, threatening words or conduct, unjust demands exceeding legal liability, or acts of damaging credibility or obstructing business by fraudulent means or force. Because attribute requirements alone may not allow the company to respond immediately to unjust demands or malicious business obstruction occurring after the transaction has begun, specifying conduct requirements and the obligation "not to cause these acts to be carried out through a third party" increases the clause's effectiveness.

Termination Procedures upon Breach and Post-Termination Handling

The effectiveness of an anti-social forces clause depends on what responses are available under the contract when a breach is suspected or discovered. The stage at which there is suspicion is judged separately from the stage at which a breach has been confirmed. Where the counterparty is connected with anti-social forces, it is often inappropriate to give notice demanding performance with a certain cure period, as with an ordinary breach of obligations, so contracts commonly provide for "termination without notice to cure," which requires no such demand.

However, even with a special provision for termination without notice to cure, the manifestation of the intention to terminate itself does not become unnecessary. The company checks the notice address and method of notice and ensures that it can record the arrival of the manifestation of its intention to terminate. In the clause, the company checks whether breach of the anti-social forces clause is an independent ground for termination, whether termination without notice to cure is specified, and whether there is a provision exempting the company from liability for losses incurred by the counterparty as a result of termination. In addition, in continuing business relationships, the company confirms that the wording allows it to terminate not only the master transaction agreement but also all individual contracts formed under it.

What should be noted when deciding on termination is not to jump to the conclusion that a ground for termination has been objectively established merely because a database search returned a match on the same name or because of outside reports of suspicion. It is important to confirm whether it is the same person, carry out corroborating investigations, and carefully assess the contractual requirements and legal validity. For cases where the decision is difficult, the company should have procedures in place for promptly consulting experts such as the police, the Center for the Elimination of Boryokudan (organized crime groups) and its outside counsel.

Even if the contract can be terminated, the handling of property relationships afterwards remains. Post-termination responses are needed, such as payment of unpaid amounts, taking back goods already delivered, settling deposits, and the return or deletion of disclosed confidential information. Where the counterparty is suspected of being an anti-social force, it is also essential to take care, in order to ensure the safety of the staff in charge, to avoid direct face-to-face negotiations or site visits of the kind that might take place when an ordinary contract ends. A safe point of contact and means of communication should be decided in advance.

Moreover, the mere fact that the counterparty has been found to be an anti-social force does not mean that payment obligations that have already arisen are extinguished as a matter of law. Because the provisions prohibiting the provision of benefits under the ordinances contain certain requirements and exceptions for justifiable reasons, the legal basis and settlement method are decided after careful discussion with the accounting department, so that a hasty suspension of payment or set-off does not lead to legal disputes.

A Checking Structure Suited to Each Stage of the Transaction, and Records

An anti-social forces clause is not complete simply by being written into the contract. The company decides on internal checking procedures corresponding to the clause, so that it can respond when doubts arise. It checks the laws and regulations applicable to each transaction and decides on the checking procedures according to the scale and risk of its transactions.

In practice, the company carries out anti-social forces checks before starting a transaction, confirmation of officers and shareholders, searches of public information and databases, and the like. Even if the counterparty represents in the contract that it is not an anti-social force, if the company has carried out no checks at all internally, it will be difficult for it to be assessed as having exercised appropriate management. At the same time, the internal decision-making route, specifying who makes the final decision on the transaction when suspicious information is detected, should be decided in advance.

Checking is not something done only once at the start of the contract. During the course of a transaction, the counterparty's officers or beneficial owners may change, or unnatural demands may arise. In long-term transactions, it is useful to update information at opportunities such as contract renewals and periodic credit reviews, and to keep records of the checks. In the contract, the company considers a clause requiring cooperation with investigations and reports if doubts arise during the transaction period. It also checks whether it can suspend the transaction temporarily during an investigation. If temporary suspension is permitted, the necessary grounds, procedures and period should be specified, so that the clause does not allow indefinite suspension on mere suspicion.

The main items to check in reviewing an anti-social forces clause are as follows.

• The scope of the definition of anti-social forces
• How far the coverage extends: officers, beneficial owners, parent companies and subsidiaries
• Prohibition on lending one's name and on providing funds
• Conduct requirements such as violent demands, threatening words or conduct, and obstruction of business by fraudulent means or force
• Application to unjust acts carried out through third parties
• Whether termination without notice to cure is available upon breach
• Exemption from liability for the counterparty's losses resulting from termination
• The scope and procedures for claims for damages
• Application to the master transaction agreement and all individual contracts
• Consistency with the practice of anti-social forces checks before starting a transaction

Considerations in Cross-Border Transactions and Capital Policy

In cross-border contracts with overseas companies and in new forms of service, there are situations where the wording of Japanese organized crime exclusion clauses is hard to apply as is. Because the context specific to Japanese organized crime exclusion practice may not be readily understood by overseas companies, clauses addressing the applicable sanctions regulations and anti-corruption regulations are considered separately. Since these are not the same system as the anti-social forces clause, the company does not simply substitute translated terms, but checks the scope according to the counterparty and region.

Anti-social forces clauses and the checking structure are also carefully examined in the context of M&A, financing and preparation for an initial public offering (IPO). Investors, buyers and underwriting securities companies investigate intensively whether there is any involvement with anti-social forces not only in the company itself but also in its key business partners. If anti-social forces clauses are missing from contracts signed in the early days of the company or from important transactions that proceeded on purchase orders alone, the company may be asked to hurriedly obtain additional agreements or confirmations at the due diligence stage. Routinely reviewing whether contracts with key business partners include anti-social forces clauses and whether screening records are properly kept is how a company prepares to present supporting materials in DD.

Frequently asked questions

What is an anti-social forces exclusion clause (anti-social forces clause)?

It is a clause that serves as the basis for promptly ending the contract and recovering losses where, for example, a business partner is connected with anti-social forces. This is because the discovery of a relationship with anti-social forces may lead to the suspension of financing or adversely affect a listing examination. It is generally considered common to secure the clause's effectiveness by setting out attribute requirements, which focus on the counterparty's status, and conduct requirements, which prohibit violent demands and the like.

If the contract includes a provision for termination without notice to cure, can we terminate the contract without notifying the counterparty?

The contract cannot automatically be terminated without notice. This is because even with a provision for termination without notice to cure, the manifestation of intent to terminate itself is still required. It is necessary to confirm the notice address and method of notice and to be able to record that the manifestation of intent has reached the counterparty. It is also understood that, rather than jumping to conclusions based on suspicion alone, supporting investigation must be conducted carefully.

If a business partner turns out to be an anti-social force, can we refuse to pay outstanding accounts payable?

Payment cannot automatically be refused. This is because even if the counterparty turns out to be an anti-social force, payment obligations that have already arisen do not automatically cease to exist by law. Since the prohibitions on providing benefits under local ordinances have certain requirements and exceptions for justifiable reasons, careful settlement is likely required so that a hasty suspension of payment or set-off does not give rise to legal disputes.